Imagine you fill up your car with gas, enter the cash box with a nonchalant "Pump five, please!" and you get 20 Euros paid out instead of putting them on the cashier’s table. Pure fiction? On April 20 of this year, the contract price for WTI oil slipped into negative territory for the first time in decades. Buyers of a barrel of crude oil should thus have received 40 US dollars instead of paying them. The reality, however, is, as always, a little more complex: The negative price did not immediately affect the gas station prices and heating oil is also not given away "with a surcharge". In the meantime, the oil price has also stabilized again - mainly due to trade policy agreements and not to risen oil consumption.
The phenomenon of negative prices on the oil market has gained a great deal of attention from the press, but on the electricity market of the 21st century, negative prices are not really newsworthy. They occur regularly, not only during a pandemic. But where do negative electricity prices come from, and do they have exclusively negative consequences? How can negative price developments be prevented – and is this prevention always desirable?
How do Negative Electricity Prices Occur?
In High School, everybody learns that market economy bases on the interaction between supply and demand. Schoolbooks make often use of apples or pears as examples: If the harvest is good, the fruit is cheap - poor harvests cause fruit prices to rise. However, apples and pears can be stored for a relatively long time: When a shortage comes up, the farmers sell the fruit from the warehouse at a reasonable price. Electricity or crude oil, on the other hand, are very hard to store in world market quantities.
Especially electricity has to be consumed right in the moment when it is generated. Apart from small storage capacities, in comparison to the amount of generation and consumption, electricity cannot be stored in the power grid. Power market players have to forecast generation and consumption as accurately as possible and then have to take care of possible deviations with balancing energy. In the event of a short, unexpected oversupply of electricity, the transmission system operators call on negative balancing reserves. Electricity generators switch off, large consumers ramp up, both are compensated with money from the balancing reserve markets. These and other factors cause the electricity price to dropvery quickly – in the day-ahead market, in the intraday auction and in the continuous intraday market. An overproduction of electricity can therefore lead to negative electricity prices in a very short time - but how do they develop in the first place?
How Does an Oversupply of Electricity Occur?
An oversupply of electricity always occurs when power generators produce more electricity than the demand side can consume. It would therefore be logical to immediately throttle or stop the power production and activate large electricity consumers. Unfortunately, this is anything but easy in such a complex structure as the electricity system: the transmission system operators as guardians of the electricity grid do not have simple accelerator or brake pedals with which they can just throttle electricity generators. Instead, they have to send a lot of shutdown or throttling commands to all generation units in a well-coordinated manner.
Although these signals arrive within seconds, the generation unit also needs time to react. In the case of a large power plant at full load, this reaction timecan be several quarters of an hour, wind power plants have to feather their blades and stop rotating, flywheels in CHPs and turbines have to run out. In addition, there are also requirements arising from the peculiarities of the network topology. Under- and oversupply never occur evenly throughout the entire power grid. Radical shutdowns of regional power supply units are impossible due to the security of supply. "Better a few hours of negative prices than a blackout in the Ruhr area" works as a rule of thumb.
However, negative electricity prices are not an expression of market failure. In contrary, they are an expression of a working electricity market: Though they are annoying for the plant operators, power traders view them more neutrally. This is because the price is merely the signal of the relationship between supply and demand. Negative prices are no immediate signal for hectic action: In a working market system, the electricity producer consciously decides whether to produce at a negative price or not. However, negative electricity prices are noteworthy if they occur at unusual times – which brings us to the spring of 2020 with high supply and low demand due to the effects of the COVID-19 pandemic.